This copy is for your personal non-commercial use only. To order presentation-ready copies of Toronto Star content for distribution to colleagues, clients or customers, or inquire about permissions/licensing, please go to: www.TorontoStarReprints.com

Bob has lost his executive job and salary at age 61, leaving him with a smaller company pension than he had planned.

He and his wife Sarah, an Ontario government employee, had expected to work and save for another four years, when she would turn 60 and be eligible for her own pension. Now they must reassess their plans for retirement.

Once they sell their Toronto-area home, they will have plenty of money to buy and maintain a place closer to skiing and a lake well stocked with fish. But they would like to be sure they will attain the lifestyle — the fun, travel, and late-model cars – they had in mind for retirement.

So Bob is wondering how to make the most of his severance pay and registered retirement savings plan, a total of $210,000. Should he turn this nest egg into the equivalent of an additional pension, by securing a guaranteed minimum withdrawal benefit from a life insurer?

Ivar Grimba, a Certified Financial Planner with Assante Capital Management in Mississauga, suggests he should not. “Given his circumstances and objectives, those are not the vehicles he should be looking at.”

Article Continued Below

Putting $210,000 into a guaranteed minimum withdrawal plan would assure Bob an additional $8,400 a year for life, or 4 per cent of his original savings. Payments would not increase over time, unless he achieved investment returns near or higher than the historical average for a 60/40 mix of stocks and bonds.

The purchasing power from his $40,000 company pension would not increase, regardless of investment returns. Only his Canada Pension Plan (about $9,240 a year from his age) and his Old Age Security pension (about $6,500 starting at age 65) would be adjusted to keep up with consumer prices.

Sarah will be eligible for a smaller workplace pension than Bob: $34,000, not counting a bridge payment equivalent to the CPP until age 65. But, thanks to annual adjustments guaranteed by the government, her pension would eventually surpass Bob’s. Then, to minimize tax, she could split some of her pension with Bob.

Grimba’s suggestion for Bob is to keep part of his $210,000 RRSP to use in case of emergency, and for major purchases (in combination with a personal line of credit). He would suggest investing the rest to supplement his pension as a hedge against price inflation.

“Part of it should be his rainy-day money,” Grimba urges. “All of his other retirement income sources are monthly ones; so liquidity is pretty important to him. He should have something he has direct access to, in case he gets sick and wants to go to the Cleveland Clinic (in the United States.) Who knows?”

“The advantage that Bob and Sarah have is that their pension plans are going to ensure that they have a stream of income for the balance of their lives,” Grimba adds.

“They are pretty much immune from poor (investment) market performance. They are significantly less vulnerable than someone who has had to build up and manage their own retirement nest egg and has to be very concerned about what is happening in the marketplace.

“Bob and Sarah are in pretty good shape other than the fact that Bob’s pension plan is not indexed. So his thought process should be: ‘Given our objectives and resources, I should allocate my RRSP to investments that will provide me with a hedge against inflation.’ ”

If price inflation were to average 3 per cent a year, his $210,000 RRSP would provide 25 years of inflation protection for his $40,000 pension, provided his investments could earn 5.5 per cent a year. He should obtain professional advice on how to construct a well-balanced portfolio specifically designed with his unique goals and objectives in mind, says Grimba.

Bob says he plans to seek contract work, and save more money until Sarah retires.

The Clients

Bob, 61, Sarah, 57.

Their situation

Bob has lost his executive salary and started drawing a smaller pension than expected.

The strategy

Sell their Toronto-area home in four years and buy a place in cottage country. Use Rob’s $210,000 in registered savings to provide an emergency fund and inflation protection for his $40,000 company pension.

Assets

Liabilities

Zero

Projected income

Projected expenses

James Daw is a former Toronto Star columnist and a Certified Financial Planner. Reach him at jamesdaw@sympatico.ca

More from the Toronto Star & Partners

LOADING

Copyright owned or licensed by Toronto Star Newspapers Limited. All rights reserved. Republication or distribution of this content is expressly prohibited without the prior written consent of Toronto Star Newspapers Limited and/or its licensors. To order copies of Toronto Star articles, please go to: www.TorontoStarReprints.com